[liamtuohyff]

Slightly ironic that you comment about the silliness of reserves on a post about insolvency of a bank that likely had little reserves

[gruez]

Right, but reserve requirements are in the order of a few percent, certainly not enough to prevent a bank run, or preventing you from being insolvent when the bonds you're holding went down in value by 20% due to interest rate movements. At the end of the day what you actually care about is whether you have more assets (cash or equity) than liabilities.

[pishpash]

Reserves are but one tool in the arsenal and it's also for tightly managing the maximum leverage. If all your assets are not cash-equivalent and they fluctuate in value then there is no maximum leverage that can be guaranteed a priori and there is operational risk.

[eru]

Yes, reserve requirements don't guarantee any maximum leverage either.

Suppose your assets are 50 dollar reserves and 50 dollar investments.

The liability side of your balance sheet is 20 dollars of equity and 80 dollars deposits. For a leverage ratio of 1:4.

If the investments drop 10 dollars in value (to 40 dollars), your leverage ratio goes to 1:8.

If the investments drop 20 dollars in value (to 30 dollars) your leverage ratio goes 1:infinity.

If your investments drop below 30 dollars (say to zero), you are insolvent.

Yes, reserves are a tool that banks can use. But that doesn't mean that legal minimum reserve requirements are a good idea.

[rvnx]

Reserve money and insurance are very silly until you need them.

[eru]

Rubber duckies are very silly, until you need them. (Afterwards, too.)

Just to be clear: the problem is that SVB didn't have enough loss absorbing equity. If they had more, they wouldn't be insolvent.

[eru]

Why? I don't see any irony here.

The bank also had very few chocolate coins (probably none), but that doesn't mean requiring them to hold more of those in their vault would have improved matters.

The problem is that the bank is insolvent; not so much that the bank is out of liquidity.

If they were solvent, someone would lend them the liquidity they need.